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Argentina Politics October 2019

Argentina: Fernández on course to win elections; considerable policy uncertainty ahead

Alberto Fernández’s Everyone’s Front coalition (Frente de Todos) is the strong favorite to win Argentina’s general elections scheduled for 27 October, increasing the likelihood of unorthodox economic policies ahead. There is, however, considerable debate over how radical Fernández’s economic plan would be if elected. Particularly, while Alberto Fernández is largely considered to be a moderate Peronist, the specter of his running mate, populist former-President Cristina Fernández de Kirchner, looms large. And investors are on edge that a Fernández-Fernández victory would mean a return to runaway government spending, nationalizations, price controls and a politically-dominated Central Bank, which risks further battering investor confidence and derailing the Argentine economy.

There is also considerable uncertainty over how a Fernández-Fernández administration would handle the country’s bulky debt stock and its precarious fiscal situation, including the IMF’s credit loan. Alberto Fernández recently hinted at a Uruguay-like reprofiling, which means the new government could try to extend debt maturities via negotiations with creditors. Little is certain at this stage, however.

In terms of economic policies, Fernández has so far said that he would introduce a price and salary agreement to tackle sky-high inflation—key to improving currency expectations and thus reviving investment. Yet, at the same, time, he has pledged to revive growth by boosting wages and consumption which would add to price pressures.

Moreover, he stated his cabinet would achieve a stable primary surplus and move towards a floating exchange rate; however, investors are wary given his criticism of President Macri’s measures to reduce the fiscal deficit, and the memory of the surge in public spending which took place under the governments of Cristina Fernández de Kirchner and Néstor Kirchner. This explains the massive peso selloff which followed Alberto Fernández unexpectedly large victory at 11 August’s primary elections.

Commenting on the fiscal scenario of a likely Fernández government, Ben Ramsey, executive director in the Latin America research group at JPMorgan, noted:

“The Treasury’s financial needs limit any sort of fiscal space amid markets’ reluctance to finance primary fiscal deficits and a challenging negotiation with the IMF for a new program. Any attempt to take shortcuts may further weigh down consumption and put the economy in a more profound contraction. [In late September], leading presidential candidate Alberto Fernandez said at a business conference that a lighter maturity extension (similar to Uruguay’s in 2003) would “not be that difficult.” To us, this looks like keeping options open rather than committing to a specific path at this stage, and we think the overall needs of the restructuring will eventually lead to a more comprehensive approach following an eventual program with the IMF once a new government is formed.”

The next government will face a challenging economic and social environment, characterized by sky-high inflation and interest rates, investor mistrust, the renegotiation of the country’s bulky debt and widespread discontent in a population frustrated by a rising unemployment rate and vanishing purchasing power. LatinFocus Consensus Forecast analysts see the economy in recession this year, contracting 2.8%, unchanged from the previous month’s forecast. Analysts see GDP falling 1.4% in 2020, which is also unchanged from last month’s projection.

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